A California federal jury awarded Sanford Wadler, former General Counsel of Bio-Rad Laboratories, $8 million for his claims against his former employer under the whistleblower provisions of Sarbanes-Oxley (SOX) and the Dodd-Frank Acts (DFA). This case implicates a number of key issues confronting companies and their in-house legal teams, including:  (1) protections and scope of the attorney-client privilege; (2) what constitutes protected activity from an in-house attorney or compliance officer; (3) the importance of consistent and timely performance critiques; and (4) preparing adverse employment decisions to be scrutinized by a judge, jury, or arbitrator.  The case also highlights the existing split among federal courts regarding what constitutes a “whistleblower” under the DFA.

Background on the Wadler v. Bio-Rad Laboratories Case – Wadler was the General Counsel of Bio-Rad for over 20 years. In 2011, while Wadler was its General Counsel, Bio-Rad uncovered evidence of Foreign Corrupt Practices Act (“FCPA”) violations by Bio-Rad employees in Vietnam, Thailand, and Russia.  Bio-Rad had outside counsel investigate these issues, as well as concerns about such violations in China.  Outside counsel concluded that violations had occurred in Vietnam, Thailand, and Russia, but not China.  Bio-Rad addressed the violations with the Department of Justice, ultimately paying $55 million to resolve the matters.  According to Bio-Rad’s evidence at trial, its outside counsel during or after these investigations advised Bio-Rad that Wadler should be terminated due to his lack of oversight of these issues.

In February 2013, Wadler issued a report to Bio-Rad’s audit committee detailing his alleged concerns that the Company had indeed violated the FCPA in China. Bio-Rad hired yet another outside firm to investigate Wadler’s allegations, which overlapped with a pre-existing investigation.  The outside firm concluded that Bio-Rad had not violated the FCPA in China.  The Department of Justice reached a similar conclusion related to Bio-Rad’s China activities.

In June 2013, Bio-Rad terminated Wadler. Bio-Rad’s stated justification for Wadler’s termination was his general poor performance, which led to the FCPA violations in Vietnam, Thailand, and Russia, as well as his mistreatment of employees, yelling at them and slamming his fists on tables.

To support its decision to terminate, Bio-Rad presented the jury with a 2012 performance review documenting Wadler’s poor performance, which Bio-Rad purportedly addressed with Wadler in April 2013. However, metadata on the performance review (the underlying electronic information in the document) revealed that it was not created until July 2013, after Wadler’s termination.

During trial, Wadler also presented evidence that (1) the Company had previously given him generally positive performance reviews and (2) others were not terminated after yelling at subordinates and co-workers.

When presented with the issues, a jury concluded that Wadler (1) engaged in protected activity under SOX and DFA when he issued the report to the audit committee and (2) Bio-Rad terminated Wadler for engaging in that protected activity. The jury awarded Wadler $2.96 million in lost wages and stock options and $5 million in punitive damages.  Under the DFA, Wadler’s lost wages could be doubled.

As noted above, this case presents a number of significant issues for companies supervising in-house attorneys, mitigating compliance risks, and avoiding whistleblower claims.

The Attorney-Client Privilege – In a decision from December 20, 2016, the Court addressed the attorney-client privilege issue in great detail as much of the information Wadler needed to pursue his claims was covered by the attorney-client privilege. After a detailed analysis of state and federal law, the Court found the following:  (1) Bio-Rad waived the attorney-client privilege as to certain information it presented to the Department of Justice and OSHA during agency investigations; (2) Wadler would be permitted to present evidence otherwise protected by the attorney-client privilege so long as it was “reasonably necessary to any claim or defense in the case”; and (3) to the extent California’s attorney ethics rules prevented Wadler from disclosing certain attorney-client privileged information in his case, those rules were preempted by SOX regulations, which expressly preempted conflicting or inconsistent state laws.  While it may ultimately prove difficult to defend a whistleblower claim based on the defense of attorney-client privilege, employers should be mindful of certain disclosures at government agencies that might waive the privilege and affect the company’s ability to preserve the privilege.

The Expansiveness of Protected Activity in General – As a general counsel, one of Wadler’s jobs was to identify and mitigate legal risks for Bio-Rad by advising Bio-Rad of potential areas of concern. Most circuits have found that before being deemed to have engaged in protected activity, employees in compliance positions must first overcome a general “presumption that they are merely acting in accordance with their employment obligations” and not engaging in legally protected activities.[1]  While this issue does not appear to have been an issue at trial, it certainly is an issue that companies should be aware of when disciplining or terminating in-house attorneys or compliance officers.  Companies should be mindful of reports or actions that the employee might later claim were protected activities.

The Importance of Consistently Addressing Performance-Related Issues When They Arise – When an employment relationship reaches the point of separation due to performance-related issues, it is best for a company to be able to show that (1) the employee was previously disciplined for conduct that led to termination and (2) others have not been permitted to engage in such conduct and remain employed. Wadler’s presentation of evidence that his performance review was created after his termination suggested that he had not been previously criticized in the manner the company claimed and possibly that the business justifications the company presented were not legitimate.  His presentation of evidence that others had yelled or otherwise mistreated other employees similarly demonstrated that the company likely did not consider such conduct to be a terminable offense.  Prior discussions of performance deficiencies with Wadler and consistent discipline of others engaged in similar conduct might have persuaded the jury that those were legitimate reasons for Wadler’s termination and dissuaded them from adopting Wadler’s version of events.

Preparing Adverse Employment Decisions to Be Scrutinized by a Third Party – When an employer takes an adverse action against an employee, it is almost always conceivable that a judge, jury, or arbitrator might have the opportunity to second-guess that decision. Accordingly, it is important that the company present itself as the most reasonable person in the room such that the third party will side in the company’s favor.  Based on reports from the Wadler trial, it appears that metadata cast doubt on the history of Wadler’s documented poor performance and Bio-Rad’s credibility for the jury.  By relying on the April 2013 performance evidence, which metadata showed was created after Wadler’s termination in July 2013, a jury was able to make a credibility determination relative to Bio-Rad, which cast doubt on the explanations it provided for Wadler’s termination.  This, in turn, allowed Wadler to fill that void with his theory of the termination.  At any trial, arbitration, or on summary judgment, it is important that the evidence show the employer to be the most reasonable person in the room.  Misdated or after-the-fact justifications allow a jury to draw a negative conclusion about the veracity of a company’s decision.

Courts Are Still Split on What Constitutes a Whistleblower Under the DFA – The Wadler case again highlights the still existent split among federal courts regarding what constitutes “protected activity” under the DFA. By its language, the DFA prohibits retaliation against an “individual who provides . . . information relating to a violation of . . . securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].”  The Fifth Circuit has held that an employee must disclose relevant information about violations of securities laws to the SEC to gain whistleblower protections under the DFA. See Asadi v. GE Energy, 720 F.3d 620 (5th Cir. 2013). The Second Circuit has held that an employee need only disclose such information internally to the employer to gain such whistleblower protections. See Berman v. Neo@Ogilvy, 801 F.3d 145 (2d Cir. 2015).  The Northern District of California in the Wadler case sided with the Second Circuit, finding that a whistleblower need not report a violation of law to the SEC to be deemed a whistleblower under the DFA. See Wadler v. Bio-Rad Labs., Inc., 141 F.Supp.3d 1005, 1024-1027 (N.D. Cal. 2015).  An employee can gain such protections by making an internal report.  This split is increasingly important in whistleblower cases due to the DFA’s provision doubling back pay awards for successful plaintiffs.

[1] See U.S. ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1261 (D.C. Cir. 2004) (citing Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 568 (6th Cir. 2003); United States ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514, 1522-23 (10th Cir. 1996)). See also Stein v. Tri-City Healthcare Dist., 2014 U.S. Dist. LEXIS 121112 (S.D. Cal., Aug. 27, 2014) (“A compliance officer like Stein must prove that he went beyond his normal job duties to show that his employer knew he was engaging in protected activities.”).